GENERATING efficiency in the health-care market will be one of President Obama’s greatest challenges. To do this, he will have to create meaningful competition between drug companies, and between public and private plans. Congress’s attempt at market-driven health care offers good instruction in what not to do....

GENERATING efficiency in the health-care market will be one of President Obama’s greatest challenges. To do this, he will have to create meaningful competition between drug companies, and between public and private plans. Congress’s attempt at market-driven health care offers good instruction in what not to do.

Medicare Part D, the prescription benefit that went into effect three years ago, was supposed to let the elderly get their medicines more cheaply by creating competition between private insurers. Yes, the program has undeniably improved access to prescriptions. But the cost to taxpayers has been 3.5 times the market value of those prescriptions, according to a study in the journal Health Affairs.

Part of the problem was that insurance analysts saw a chance to double the size of the managed care industry. Drug companies stood to collect $30 billion in windfalls over the coming decade. So legislation was pushed, paid for and effectively drafted by thousands of lobbyists.

Proposals requiring the government to use the buying power of 40 million Medicare patients to negotiate prescription prices were defeated. Pharmaceutical lobbyists fought for direct federal subsidy of drug benefits, knowing plans would be reimbursed no matter how much prices were inflated. Lobbyists also prevented identical but less expensive drugs from Canada and other countries from coming here. After arm-twisting that reduced at least one member of the House of Representatives to tears, the bill to expand Medicare passed at 5:53 a.m. on a November morning in 2003.

When the program went live in 2006, a fragmented market of 80 insurers — with 1,400 prescription drug plans — lacked the purchasing power to negotiate drug prices. Nor did those insurers have much reason to bargain, since Part D subsidized the most costly patients at 80 percent. So prices under Medicare private insurance plans for the top 10 medications shot up, and in 2006 the five largest drug firms notched a 45 percent spike in profits over the previous year. After insurers rushed to sign as many retirees as possible at attractive rates, they raised premiums 13 percent. Medicare patients in private plans cost taxpayers about 15 percent more than those covered under traditional government programs.

Then the story started to resemble a Dickens novel. State insurance commissioners complained about a nationwide pattern of aggressive, abusive and deceptive marketing practices by sales agents. Free of basic oversight and enforcement, other insurance agents and brokers manipulated the elderly by falsely claiming that they worked for Medicare, selling unrelated and inappropriate policies, bullying the elderly and even forging signatures.

It doesn’t have to be this way. There are a few relatively simple steps Congress could take quickly to redeem Part D, and build momentum for effective, market-driven health care reform.

Congress should begin by requiring private insurers accepting public money to offer a plan option equivalent to what the Department of Veterans Affairs offers, at the same price. Another important step would be mandating that the Department of Health and Human Services negotiate drug prices on behalf of Part D plans. Rather than reimburse private insurers for pharmaceuticals through unlimited direct subsidy, Washington could compare prices paid by Part D plans to Medicaid’s best prices (today both price lists are confidential), and pay at either market or Medicaid rates, whichever is cheaper. Deceptive marketing could be combated by passing a bill to allow states to regulate and police marketing. To further ease confusion, Medicare should clearly outline plans with simple side-by-side comparisons of costs and benefits.

The public can also play an important role. While the larger health-care reform debate unfolds in Washington, the rest of us can keep an eye on the members of Congress who may be the most conflicted about bringing real competition to bear. At sites like www.maplight.org you can see whose campaigns have gotten the plushest contributions from pharmaceutical manufacturing and managed care companies.

This year, total Medicare and Medicaid spending will probably account for nearly a quarter of all federal spending, and by 2016 it could rise to almost a third. Enlisting real competition will be crucial to containing costs. So before offering a new universal benefit for the millions of Americans who lack health insurance, Congress should put an end to manipulative profiteering in Medicare. As challenging as the program’s problems may be, they do not prove that a market-based approach can’t work.